Business subsidies in the hands of politicians

The impact of business subsidies must be assessed through the analysis of firm-level data that is extensive enough, writes Anni Huhtala. This allows us to discover which part of the impact is the result of the subsidising and which part derives from something else. Anecdotal evidence is not enough.

Business subsidies are a constant source of debate. The subsidies interest not only the companies at the receiving end of them, but also those who do not receive subsidies – or do not want to receive them – and who suffer from the subsidies’ detrimental effects on competition. Economists are trying to introduce their research data to the debate, so that the subsidies would serve the common good. Politicians decide.

As such, they are responsible for a lot. Even in Finland, business subsidies are estimated to amount to roughly four billion euros a year. It is a rare occasion that the Parliament gets to decide on sums of this magnitude.

Half of the four billion pot consists of what are referred to as tax subsidies. Tax subsidies are considered to be subsidies because, among other things, a company operating in another competing sector has to pay its taxes in full. The refunds of electricity taxes for energy-intensive companies, for example, are financed by the wallets of households and businesses that pay their electricity taxes in full. The more tax breaks some companies receive, the greater the need to patch up the state budget by taxing others.

When business subsidies are cut, the companies that get to be heard are the ones receiving the subsidies. This is justifiable, since subsidies are often granted for reasons related to competitiveness. Making it in the highly competitive international markets is indeed difficult. Electricity is too expensive, labour costs are high, other countries simply offer better business environments and provide better subsidies. Finland is even an island.

To the ears of an economist, it sounds strange if the state must support cost competitiveness. Doesn’t functional competition expressly ensure that the best companies make it, while others die out? Viability is tested particularly in a competitive market economy.
A politician shudders when a company informs them that a cut in subsidies will result in the loss of hundreds, if not thousands, of jobs. Should the politician, in such cases, believe the researcher?

A politician shudders when a company that receives subsidies informs them that a cut in the subsidies will result in the loss of hundreds, if not thousands, of jobs. Should the politician, in such cases, believe the researcher who swears by the name of economic reform, or the company, which has always employed a lot of people in Finland? Nobody is speaking for the new company, which would be able to enter the market and become an employer, were the subsidies eliminated.

The researcher may not be listened to for fear that they live in an ivory tower.

Companies struggle with their competitiveness on a daily basis. Why does production design invariably fail to produce better delivery times? Why did the corporate acquisition mess up operations for months? Although these questions are interesting, to the researcher they represent anecdotal evidence. A researcher cannot focus on the problems faced by a single individual company at any given time.

The impact of business subsidies must be assessed through the analysis of a sufficiently large amount of corporate data, so that we can reliably extract data on the impact of the subsidies and any impact derived from other sources. This will also allow politicians to rely on research when deciding on subsidies. At the same time, they can also decide that the impact of the subsidies must be assessed in the appropriate manner.